This article was initially published in Competition Law Insight, 28 July 2009 issue.
In February 2009, the OFT was invited by the UK government, as part of the Digital Britain review of the UK's digital and communications policy, to look into whether any legislative changes to the UK's media merger regime are necessary (the OFT Review).
The OFT Review arose out of widespread concerns about the implications for the UK's local and regional print publications of the increasing migration of both news content delivery and advertising to the online space. Circulation and advertising revenue of such publications have been declining for years, and the economic downturn has intensified these pressures.
Media groups apportion a large share of the responsibility for the industry's difficulties with (what these groups see as) the heavy-handed antitrust regulation of media mergers, which, they claim, stifles innovation and deters the restructuring required to respond to new competitive dynamics. By no means an isolated critique, such arguments have, as will be seen below, gained some political traction in the United States in particular.
Nevertheless, the report following the OFT Review, published in June, concludes that no legislative changes are required in the UK. This article looks at why the OFT considers the UK media merger regime to be "fit for purpose" and what this means for UK newspaper and magazine publishers.
The regulation of media mergers in the UK
Subject to the public policy considerations referred to below, media mergers are largely governed by the same rules as other industries. Media mergers can generally qualify for review by the UK competition authorities (as a "relevant merger situation") under the Enterprise Act 2002 (the Enterprise Act) when two or more enterprises "cease to be distinct" and either:
- the UK turnover associated with the enterprise being acquired exceeds £70m (turnover test); or
- the merged entity will supply or acquire at least 25% of goods or services in a market in which both of the merging companies previously operated (share of supply test).
Since many local or regional publications are unlikely to satisfy the turnover test, mergers involving local and regional media groups tend to be caught by the share of supply test (as the geographic market definition will usually be limited to the locality or region in question).
As well as a competition review of media mergers, the Enterprise Act recognises the public interest element related to such mergers. Accordingly, the Act provides for possible intervention by the Secretary of State for Business, Innovation and Skills in relation to stated public interest considerations – for example, the need for accurate reporting, free expression and a plurality of opinion in newspapers in each market.
Criticisms
The current regime has been the subject of vigorous criticism from local and regional media groups during the OFT Review. In relation to newspapers, these complaints centred on the OFT's approach to defining the market used to frame its assessment of a merger's anticompetitive effects as the market for the supply of weekly newspapers and advertising space in local papers. Singled out for particular criticism was the OFT's finding in the Dunfermline Press/BRN case in 2008 that competitive pressures from the internet would not have been strong enough to alleviate the loss of competition when two rival print titles merged. Many respondents believed this showed the OFT as being out of touch with the new realities of the digital media age. Print media markets, the publishers argue, are no longer self-contained. Rather, local and regional print publications now face competition for both readers and advertisers from many other media platforms, notably the internet and subsidised local authority publications.
The OFT Review also resulted in some comments on market definition. For some time, the OFT has used very narrow market definitions for mergers in the print media sector (particularly in relation to consumer magazines). For a merger bringing together complementary titles, a narrow view of the market poses few problems. However, where titles overlap, a narrow market definition subjects relatively low value deals to, at best, considerable regulatory uncertainty. At worst, the deal may be blocked or the merging parties may be asked to restructure the transaction substantially. For example, the Dunfermline Press/BRN case was, despite its relatively small size, cleared only subject to substantial divestments.
The OFT was also criticised for not taking seriously the impact that its decisions have on the financial viability of failing titles. In the Dunfermline Press/BRN case for example, although the OFT accepted that a series of titles was making an unsustainable loss, it refused to take this into account in its analysis of the deal because it was not completely satisfied that, without the merger, the titles would necessarily have been withdrawn (and therefore, the OFT would argue, a key aspect of its failing-firm guidance was not fulfilled).
The OFT's response
The OFT's report provides little comfort to those media companies who had hoped that the OFT would recommend a change of focus in the media merger regime to reflect the "new reality". Instead, the OFT asked a number of other governmental agencies to take a view about some of the reforms proposed to the OFT. For example, it recommended that the impact of local authority publications on private local and regional media be taken up by the Department of Business, Innovation and Skills (DBIS) and/or the Department for Culture, Media and Sport. The OFT also suggested that the DBIS should clarify the scope of the public interest provisions in the Enterprise Act.
Such diffusion of regulatory responsibility seems to be part of an unhelpful and, from the perspective of the industry, confusing trend in competition policy reviews. There appears to be an increasing trend of such diffusion. One can imagine that airport operators may be equally critical about the three separate (ongoing or recently completed) reviews into the economic regulation of airports; the Competition Commission, the Civil Aviation Authority and the Department for Transport are all – or have recently been – looking at this issue.
Rather more helpfully, the OFT conceded that it would benefit from the input of industry experts in future assessments of media mergers. Accordingly, it has committed to consulting formally with Ofcom to mirror existing practices in mergers relating to the broadcasting and telecommunications markets. This welcome proposal is likely to help focus the OFT's investigations regarding the industry's wider concerns.
The OFT's guidance
However, while the OFT refused to give the industry special treatment in relation to its key concerns, it did set out its thinking regarding such concerns (so that, in future, parties can assess the likelihood that the OFT will take a particular argument seriously or not). First, the OFT recognises that some titles may not be financially viable, but notes that it, in line with its well-publicised failing-firm guidance, applies a high evidential burden to establish that an undertaking would, without the merger, have failed (although there have been several examples recently where this burden has been satisfied and the failing-firm defence has succeeded). The door remains open to such arguments, providing such a burden is met.
Second, the OFT acknowledged the consumer benefits that may emerge from media mergers, but also recognised journalists' concerns over the "delocalisation" of local news. Overall, the OFT considers that it has an analytical framework suitable to weighing up both sides of the argument.
Third, the OFT has highlighted procedures that merging parties can use to mitigate the uncertainty, time and cost associated with its investigations – for example, that parties have the option of entering into prenotification discussions to clarify the OFT's possible concerns on any given merger prior to it being notified. This is a noteworthy departure from the OFT's usual reluctance to enter into such discussions in other sectors, and perhaps it reflects some recognition that the press sector is somewhat different from other industries.
Contrasting developments in the US
A counterpoint to the OFT's report on media mergers is the parallel debate surrounding the survival of local and regional media groups in the United States. The US merger rules are already considerably more sympathetic to local media than the UK rules. Merger investigations are only triggered when the value of the transaction or the size of the acquiring party meets certain thresholds; in particular, there is no share of supply test to catch deals involving smaller titles. Further, under the Newspaper Preservation Act 1970, certain US newspaper deals are exempted from antitrust liability so long as the merged titles maintain separate sets of staff and independent editorial policies.
Nevertheless, several high profile Congressional figures have recently publicly come out in favour of relaxing the US media merger rules even further. For example, Nancy Pelosi, speaker of the House, recently pledged her support for the acutely struggling San Francisco Chronicle when, in a public letter to Attorney General Eric Holder, she called for antitrust regulation to "reflect current market realities" of the alternative sources of media in a "digital age".
In what US commentators have called unusual public communication of the issue, Mr. Holder is reported to have been broadly supportive of Ms Pelosi's position.
However, interestingly, in order to ward off possible criticism of a transatlantic divide on this issue, the OFT's report refers to a submission to the US House of Representatives by Carl Shapiro, the deputy assistant attorney general for economics in the antitrust division of the US Department of Justice (and therefore possibly closer to the coalface when it comes to putting US policy into practice). In this submission, Mr Shapiro expressed scepticism about new exemptions for struggling newspapers. Therefore, it remains to be seen how media mergers will be analysed in the US in future, and whether this will lead to a dichotomy of enforcement policy when compared to the UK.
Where does this leave UK media mergers?
While the OFT's report will have disappointed those looking to developments in the United States for encouragement, it is nevertheless a timely clarification of the OFT's near-term approach to UK media mergers.
The OFT's report should give local and regional media groups the opportunity to understand better the rules that, in the medium term at least, will apply to their mergers. Clearly, parties contemplating media mergers will now scour the OFT's report for indications as to how much weight the OFT may, or may not, place on particular arguments, depending on its treatment of such arguments in the OFT's report. It seems clear that the OFT is very unwilling, particularly in the current environment, to commit to treating a particular industry differently (except in relation to the prenotification issue referred to above). The OFT is certainly correct when it asserts that the UK media merger review system is very flexible and does indeed allow the OFT to take new developments in the media space into account appropriately when it assesses the competition impact of a media merger. Therefore, care should be taken before reading too much into the OFT's refusal to recommend changes to UK merger law (as these would in any event be difficult to pass and timeconsuming to implement).
It seems that the key issue in future will be the extent to which the Office of Fair Trading uses the flexibility in the system to deal with media mergers in an environment that has undoubtedly undergone a significant shift in the last five years. Therefore, only time will tell whether the OFT's bold statement that the UK media mergers regime is fit for purpose is a conclusion that merging parties in the media sector will share.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
